1. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-1 CHAPTERFIVE Forms of Business Ownership

2. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-2 World’s Largest Public Companies General Electric U.S. Royal/Dutch Shell Britain/Holland Coca-Cola U.S. Nippon Tele.Japan ExxonU.S. MicrosoftU.S. CompanyCountry

3. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-3 America’s Oldest Companies J. E. Rhoads & Sons 1702 Conveyer Belts Covenant Life Ins. 1717 Insurance Philadelphia 1752 Insurance Contributorship Contributorship Dexter 1767 Adhesives & Coatings & Coatings D. Landreth Seed 1784 Seeds Bank of New York 1784 Banking

4. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-4 Largest U.S. Companies 1. Microsoft$602,432 2. General Electric 507,216 3. Cisco Systems 366,498 4. Wal-Mart Stores 307,865 5. Intel 275,008 Market Capitalization (In Millions) Source: Wall Street Journal

5. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-5 Basic Forms of Ownership Sole Proprietorship Sole Proprietorship Partnership Partnership Corporation Corporation NumberSales 74%5% 8%5% 18%90%

6. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-6 Forms of Business Ownership Forms of Business Ownership

7. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-7 Sole Proprietorship  Ease of start/end  Be your own boss  Pride of ownership  Retain profit  No special taxes  Unlimited liability  Limited financial resources  Difficulty in mgmt.  Time commitment  Few fringe benefits  Limited growth  Limited life span AdvantagesDisadvantages

8. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-8 Partnership  More financial resources  Shared mgmt.  Longer survival  Unlimited liability  Division of profits  Disagreements among partners  Difficult to terminate AdvantagesDisadvantages

9. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-9 Types of Partnerships General GP GP GP GP Limited GP PassiveInvestor PassiveInvestor PassiveInvestor

10. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-10 Uniform Partnership Act Common Ownership Common Ownership Shared Profits & Losses Shared Profits & Losses Management Participation Management Participation

11. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-11 Types of Corporations  Regular ‘C’  Subchapter ‘S’  Limited Liability Corporation

12. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-12 Corporation  More money for investment  Limited liability  Separation of ownership/mgmt.  Ease of ownership change  Perpetual life  Size  Initial cost  Paperwork  Two tax returns  Termination difficult  Double taxation AdvantagesDisadvantages

13. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-13 S Corporations S No more than 75 shareholders S Shareholders S Individuals S Estates S U.S. citizens or residents S 1 class of stock S <25% of income can be passive S Tax rate = +5% S Slower-growing companies S Benefits change with new tax rules

14. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-14 Figure 5.4 How Owners Affect Management

15. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-15 Make-up of Corporate Boards Retired office of another firm89% CEO at another company87% Major company shareholder73% Ex-government official53% Academicians50% Corporate boards average 11 Directors. Most Directors by percentage are:

16. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-16 External Corporate Growth Merger/Acquisition Merger/Acquisition Horizontal Horizontal Vertical Vertical Conglomerate Conglomerate Leveraged Buyout (LBO) Leveraged Buyout (LBO)

17. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-17 Types of Mergers/Acquisitions HorizontalA B = AB Vertical Conglomerate

18. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-18 Leveraged Buyout Individual + Loan= Purchase of Company Purchase Loan Company = Collateral

19. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-19 Top U. S. Mergers Time Warner AOL $120 Bil World ComMCI$30 Bil Bell AtlanticNYNEX$26 Bil KKRRJR/Nabisco$25 Bil DisneyCAP/Cities ABC$19 Bil AcquirerTargetValue

20. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-20 Top Growth Franchises  Kumon Math & Reading Centers4,586  McDonald’s3,288  7-Eleven Convenience Stores1,023  Jackson Hewitt Tax Service 884  Taco Bell Corp. 841  KFC Corp. 567  Coverall Cleaning Concepts 548  Yogen Fruz Worldwide 520 #New Stores in 1999 Source: Entrepreneur, March 2000

21. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-21 Survival After Startup Franchise vs. Independent

22. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-22 Franchises + Management & marketing ass’t + Personal ownership + Recognized name + Financial advice & ass’t + Lower failure rate - High start-up costs - Shared Profit - Management regulation - Coattail effects - Restrictions on selling - Fraudulent franchisors Advantages Disadvantages

23. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-23 Franchise System  Franchiser  Franchisee  Franchise Agreement

24. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-24 Franchise Contract Franchisor, Inc. Franchisee Branded Product/Service PerformanceMonitoring $$$$$

25. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-25 Franchisor Assigns Territory Assigns Territory Provides Financial Aid/Advice Provides Financial Aid/Advice Offers Merchandise/ Supplies at Competitive Price Offers Merchandise/ Supplies at Competitive Price Provides Training/Support Provides Training/Support Business Expansion Using O.P.M. Business Expansion Using O.P.M.

26. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-26 Franchisee Pays Up-Front Costs Pays Up-Front Costs Makes Monthly Payment to Franchisor Makes Monthly Payment to Franchisor Runs Business by Franchisor’s Rules/Procedures Runs Business by Franchisor’s Rules/Procedures Buys Materials from Franchisor/ Approved Supplier Buys Materials from Franchisor/ Approved Supplier

27. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-27 How to Avoid a Franchise Lemon 1) Research officers & their business experience 2) Get summary of any bankruptcy & litigation 3) Estimate all costs to set up franchise 4) Review franchise contract & three most recent financial statements

28. McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-28 Benefits of a Home-Based Business  Flexible work hours  Quality lifestyle  Doing the work of your choice  Opportunity to expand using technology  Self-motivation.